Bronte Capital Management outperformed its benchmark indexes in May according to the investors letter that came out this week, but the company is still frustrated with its year-to-date performance, saying that it has been mostly going sideways for the last six months.

“To be blunt about it – this year we have – measured in US dollars – achieved little. We are not losing money in any meaningful way and we look at the portfolio and believe it to be pregnant with profit – but the day-to-day results don’t feel exciting,” John Hempton and Simon Maher wrote in the letter.

No surprises in Bronte Capital’s portfolio

They point out that the fund has alternated between outperformance and holding its ground since inception, but considering Bronte Capital started in mid-2009 when the market was roughly at its lowest point, they are well behind indexes over the full five years. The bigger question is whether they maintain those absolute returns during the next bear market.

Bronte Capital AUS acct 0614

Bronte Capital US acct 0614

The investors letter didn’t reveal any big changes to the Bronte Capital portfolio. We already knew that the fund is short on Valeant Pharmaceuticals Intl Inc (TSE:VRX) (NYSE:VRX), a position the letter describes as “includes long dated put options that only really work if Valeant implodes.” Bronte is also net long on the Euro and short the AUD. Long positions on Herbalife Ltd. (NYSE:HLF) and Senomyx Inc. (NASDAQ:SNMX) have added to the fund’s volatility, but there isn’t that much volatility in the market in general these days.

Bronte hunts for shorts among small cap biotech stocks

Hempton and Maher did get into more detail about how they approach the biotech sector, revealing that they are short ‘a high single digit percentage’ of the fund in members of the S&P biotech sector. The reasoning is that small cap pharmaceutical companies are usually working on a drug or product that might work, but might be a bust, and that the main hope is that these companies get snapped up by big pharma at a premium.

That’s already highly speculative, and it filters out the investors who want more tangible value before they are willing to buy in. But most people simply don’t have the background necessary to weigh a biotech startup’s scientific merit, which makes their investments akin to pure gambling. Bronte Capital looks for companies whose ideas are suspect and whose team seems untrustworthy and then shorts them. It’s striking that the letter specifically mentions cases where it can “determine the chief scientist is faking his PhD qualification” as a category as opposed to something that has happened once or twice.

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